Profit Formula
The profit formula, in its simplest form, is:
Profit = Total Revenue – Total Costs
Here’s a brief explanation of each component:
- Total Revenue: This is the total amount of money brought in from selling a product or providing a service. It’s calculated by multiplying the price per unit by the number of units sold.
- Total Costs: This includes all costs incurred by the business to produce and sell the products or services. It can include both variable costs (which change with the volume of goods produced, like raw materials or direct labor costs) and fixed costs (which don’t change with the volume of goods produced, like rent or salaries).
So, if you subtract the total costs from the total revenue, you’ll find the profit. This profit can either be gross profit (which doesn’t take into account indirect costs like administration and marketing) or net profit (which does take these into account).
This formula gives you the absolute profit in terms of money. If you want to find the profit margin as a percentage, you would divide the profit by the total revenue and then multiply by 100 to get a percentage.
Example of the Profit Formula
Let’s say you own a small business that sells handmade bracelets. Each bracelet sells for $20.
Here’s how you might calculate your profit:
- Total Revenue: You sold 500 bracelets last month, so your total revenue is $20 (price per bracelet) x 500 (number of bracelets sold) = $10,000.
- Total Costs: The costs to make each bracelet (variable costs) is $5. You made 500 bracelets, so your total variable costs are $5 x 500 = $2,500. Additionally, you have fixed costs like rent for your workspace, utilities, and your website maintenance which amounts to $1,000 per month.
So, your total costs are $2,500 (variable costs) + $1,000 (fixed costs) = $3,500. - Profit: Now, you subtract your total costs from your total revenue to find your profit. That’s $10,000 (total revenue) – $3,500 (total costs) = $6,500.
So, you made a profit of $6,500 last month.
If you wanted to find your profit margin as a percentage, you would divide the profit by the total revenue and then multiply by 100:
Profit Margin = ($6,500 / $10,000) x 100 = 65%
This means that for each bracelet you sold, 65% of the selling price is profit. This simple example doesn’t account for taxes and other possible expenses, but it gives a basic idea of how the profit formula works.
